By Microsoft shares MSFT rose about 2% on Wednesday after Piper Sandler raised its price target on the software giant to $610 from $550 while maintaining an Overweight rating.
The new target represents nearly 18% upside from the stock’s current trading level and reflects higher estimates and an expanded enterprise value-to-operating cash flow multiple, as the brokerage grows more confident in the outlook for Microsoft’s Microsoft 365 commercial cloud business.
The stock also benefited from broader market gains after fresh US economic data showed inflation slowing last month, pushing Treasury yields lower.
The S&P 500 rose about 0.5%, while the Nasdaq gained roughly 1%.
M365 cloud becomes a bigger AI revenue opportunity
Piper Sandler introduced a new framework for analyzing Microsoft’s M365 Commercial Cloud business following the company’s “Super App” announcement, the rollout of its new E7 tier, and increasing adoption of consumption-based pricing for Copilot and Cowork.
The brokerage estimates that every 10% shift in customer seats from the existing E5 tier to E7 could generate roughly $2 billion in annualized revenue uplift.
The immediate contribution is expected to be limited, however, as customers gradually migrate across Microsoft’s subscription tiers.
Piper Sandler also sees a significant opportunity from consumption-based revenue generated by Copilot and Cowork.
The firm estimates that these businesses could reach a $2 billion annualized revenue run rate by the end of fiscal 2028.
The analyst said the value proposition of Copilot and Cowork is partly based on Microsoft’s ability to use its enterprise technology “harness” and auto-routing capabilities to perform tasks at lower costs than relying exclusively on frontier AI models.
That could allow Microsoft to generate revenue from AI consumption at a faster pace than the traditional seat-based Copilot model.
The opportunity is particularly important as investors increasingly focus on whether technology companies can translate heavy AI investment into sustainable revenue and cash flow.
Analysts see stronger Azure and Copilot growth
Piper Sandler’s bullish view follows a similar shift in sentiment from other Wall Street analysts.
Last week, Stifel upgraded Microsoft to Buy from Hold and raised its price target to $575 from $530, citing growing confidence that the company can sustain revenue growth in the mid-to-upper teens.
Analysts led by Brad Reback said Microsoft had “clearly turned the corner post the June quarter print,” pointing to continued strength in Azure, lower large-language-model research intensity and a growing contribution from OpenAI.
Stifel expects Azure to benefit from another 200 to 300 basis points of upside as Microsoft improves efficiency across its technology stack, including silicon, models and software.
The analysts also pointed to comments from Chief Financial Officer Amy Hood that Microsoft had reduced “dock-to-live times” — the period between hardware coming online and becoming ready to generate revenue — by more than 50% over the past year.
That improvement could allow Microsoft to convert additional infrastructure capacity into revenue more quickly.
Copilot adoption adds another growth lever
Microsoft’s AI monetization story is also expanding beyond Azure.
Copilot’s seat count reached roughly 30 million in the fourth quarter, an increase of 10 million from the previous quarter.
Meanwhile, GitHub’s move toward consumption-based pricing provides another potential source of revenue growth.
Stifel expects these factors to offset moderating seat growth as Microsoft 365 approaches 500 million seats, allowing the company to sustain at least mid-teens growth for several years.
The brokerage also said its previous concerns about margin compression had proved “too negative.”
Azure efficiency gains, the elimination of revenue-share payments to OpenAI following an April contract revision, and Microsoft’s decision to extend the useful life of certain assets to 25 years from 15 years have all helped improve the margin outlook, according to Stifel.
The broader analyst community has also become more constructive.
Seventeen analysts have recently raised their earnings estimates for Microsoft for the upcoming period.
Microsoft shares head for strongest quarter in decades
Microsoft shares have risen about 10% this year, but the bulk of the recovery has come in the third quarter, with the stock up 36.4% so far.
That puts Microsoft on track for its strongest quarterly performance since the first quarter of 1998, when the shares gained 38.5%, according to Dow Jones Market Data.
The scale of the recent rebound partly reflects how sharply the stock had fallen at the start of the year.
Microsoft shares plunged 23.5% in the first quarter, marking their worst quarterly performance since the 2008-09 financial crisis.
Investors have since placed greater emphasis on the different parts of Microsoft’s business that can benefit from the AI boom.
StoneX analyst Yi Fu Lee said Microsoft has increasingly benefited from a “flight to quality” as investors seek technology companies with clearer paths to monetizing AI.
Investors have come to view Microsoft as “one of the highest-quality platforms in technology,” Lee said, according to MarketWatch.
StoneX reiterated a Buy rating on the stock.
Microsoft shifts focus from AI models to enterprise platforms
Lee said Wall Street’s focus has increasingly moved away from identifying which company has the strongest AI model and toward determining which companies control the enterprise infrastructure, data and systems where AI applications operate.
Microsoft is positioned as a platform capable of hosting multiple large language models, including those developed by OpenAI and Anthropic, he said.
The company’s recent Copilot developments have further strengthened the case that Microsoft can expand AI revenue beyond traditional software subscriptions.
“Microsoft is evolving Copilot from a productivity assistant into a broader enterprise AI platform,” Lee said, pointing to its capabilities across Home, Microsoft’s subscription offering for individuals and families; Code, its coding tool; and Autopilot, a personal AI assistant.
Tigress Financial analyst Ivan Feinseth similarly said Microsoft’s rally “reflects a meaningful improvement in the evidence behind [Microsoft’s] AI investment case.”
The post Why is Microsoft stock up 2% on Wednesday? appeared first on Invezz